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The tax and accounting treatment of the repayment of a capital contribution

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Capital contributions are not specifically recognised under UK law, making it challenging to establish how they should be treated for tax and accounting purposes. By definition, they must be treated as equity as they are neither liabilities (loans) nor income but a ‘gift’ that does not arise from a ‘commercial’ transaction. For the contributor, the contribution is generally an addition to the cost of its investment in the subsidiary for accounting purposes. For the subsidiary, the tax treatment of the receipt will depend on what the contribution is for, but a repayment will always be treated as a distribution.

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